China’s Car Market Is Heading From Recession To Depression

HANGZHOU, CHINA - SEPTEMBER 09: Aerial view of nearly a thousand electric cars parked at an open area in Xiacheng District on September 9, 2019 in Hangzhou, Zhejiang Province of China. Most of them are BAIC Beijing Electric Vehicle Company (BJEV)

VCG via Getty Images

Data geekery aside, there are four key takeaways from the sharp contraction in Chinese auto sales.

The trade war is having its intended effects. I try to avoid writing about politics, but the inescapable conclusion from poor Chinese consumer data is that consumer confidence has been impacted by the trade war, and consumer wallets seem to be feeling the impact of it, as well.

This sales slump is not a temporary phenomenon. Mr Shi Jianhua, CAAM senior official, was quoted in a Reutersarticle today:

“The sales in the second half of the year should become better, but we are not sure to what extent the sales would be....Perhaps the next three years will be at a low or small negative growth. We’re all looking forward to sales picking up, but it’s normal if we don’t get that.”

In the auto industry temporary slowdowns can be offset with seasonal plant shutdowns, especially in the summer, but an extended depression, the type of which Mr. Shi referred, would lead to plant closings, not idlings. Weaker players are always the first to feel it—Peugeot and Fiat have essentially ended Chinese production in 2019 (although Fiat is keeping the Jeep brand)—but ultimately even the strong, local players would have to lower capacity. This would have a devastating impact on the overall Chinese economy owing to the auto industry's multifaceted impact on virtually every sector of the consumer and industrial economy.

The electric vehicle revolution is not occurring in China. In a wave of ideologically-inspired agitprop from outlets such as Bloomberg, 2019 was heralded as the year of the battery electric vehicle (BEV) in China. In this Forbes article I was, I believe, the first commentator to dispute that, and three months later, the numbers have borne out my negative thesis. According to the CAAM data, sales of NEVs (BEVs and hybrids) fell 15.7% in August after falling 4.7% in July. Sales of NEV had risen for 18 months in a row before mid-2019.

Biased analysts may yammer on about the poor air quality in Beijing (I have experienced that firsthand,) melting glaciers and the Chinese government’s desire for cleaner cars, but 27 years of following the auto industry have taught me one thing: when consumers stop buying cars they stop buying all models, regardless of propulsion system.

Stocks of companies that depend on the Chinese consumer to buy cars, especially electric ones—like Tesla and NIO—are not attractive here. Elon Musk has been credited with “betting the company” on Tesla’s moves to take over related company SolarCity, introduce the Model 3 and now to build Gigafactory 3 in Shanghai. However, this is absolutely the worst time in the past decade to be introducing a newly-produced model to the Chinese market, especially an electric one. Early adopters purchased imported Model 3s despite the tariff penalties, but for Tesla to keep Giga 3 running at anything near full capacity, local buyers will have to purchase lower-end models of the Model 3. Even those tariff-free models will retail at a significant price premium to the average Chinese car, however. The CAAM figures show that that is an unlikely outcome in the current environment.

Further bolstering that argument is the fact that NIO sales have slowed to a trickle in China, with only 673 ES6 models and 164 ES8 models delivered in July. The market just isn’t there for Tesla in China. I will never be able to convince diehard Teslaphiles of that fact, I am aware. As they bid up TSLA shares in recent trading—although those shares are still down more than 15% from their level of one year ago—I will happily take the other side of that trade for my new trading vehicle, Excelsior Capital Partners.

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The Chinese auto market is crashing. Data from the Chinese Association of Auto Manufacturers show the passenger car market there contracted 6.9% in August and has fallen 11.0% for the year-to-date period. August 2019 marked the 14th consecutive decline for the Chinese auto market, an important landmark for analysts, as Chinese car sales could be said to be “going up against easy comparisons,” i.e. periods in which those figures registered a decline in 2018 versus 2017.

HANGZHOU, CHINA - SEPTEMBER 09: Aerial view of nearly a thousand electric cars parked at an open area in Xiacheng District on September 9, 2019 in Hangzhou, Zhejiang Province of China. Most of them are BAIC Beijing Electric Vehicle Company (BJEV)

VCG via Getty Images

Data geekery aside, there are four key takeaways from the sharp contraction in Chinese auto sales.

The trade war is having its intended effects. I try to avoid writing about politics, but the inescapable conclusion from poor Chinese consumer data is that consumer confidence has been impacted by the trade war, and consumer wallets seem to be feeling the impact of it, as well.

This sales slump is not a temporary phenomenon. Mr Shi Jianhua, CAAM senior official, was quoted in a Reutersarticle today:

“The sales in the second half of the year should become better, but we are not sure to what extent the sales would be....Perhaps the next three years will be at a low or small negative growth. We’re all looking forward to sales picking up, but it’s normal if we don’t get that.”

In the auto industry temporary slowdowns can be offset with seasonal plant shutdowns, especially in the summer, but an extended depression, the type of which Mr. Shi referred, would lead to plant closings, not idlings. Weaker players are always the first to feel it—Peugeot and Fiat have essentially ended Chinese production in 2019 (although Fiat is keeping the Jeep brand)—but ultimately even the strong, local players would have to lower capacity. This would have a devastating impact on the overall Chinese economy owing to the auto industry's multifaceted impact on virtually every sector of the consumer and industrial economy.

The electric vehicle revolution is not occurring in China. In a wave of ideologically-inspired agitprop from outlets such as Bloomberg, 2019 was heralded as the year of the battery electric vehicle (BEV) in China. In this Forbes article I was, I believe, the first commentator to dispute that, and three months later, the numbers have borne out my negative thesis. According to the CAAM data, sales of NEVs (BEVs and hybrids) fell 15.7% in August after falling 4.7% in July. Sales of NEV had risen for 18 months in a row before mid-2019.

Biased analysts may yammer on about the poor air quality in Beijing (I have experienced that firsthand,) melting glaciers and the Chinese government’s desire for cleaner cars, but 27 years of following the auto industry have taught me one thing: when consumers stop buying cars they stop buying all models, regardless of propulsion system.

Stocks of companies that depend on the Chinese consumer to buy cars, especially electric ones—like Tesla and NIO—are not attractive here. Elon Musk has been credited with “betting the company” on Tesla’s moves to take over related company SolarCity, introduce the Model 3 and now to build Gigafactory 3 in Shanghai. However, this is absolutely the worst time in the past decade to be introducing a newly-produced model to the Chinese market, especially an electric one. Early adopters purchased imported Model 3s despite the tariff penalties, but for Tesla to keep Giga 3 running at anything near full capacity, local buyers will have to purchase lower-end models of the Model 3. Even those tariff-free models will retail at a significant price premium to the average Chinese car, however. The CAAM figures show that that is an unlikely outcome in the current environment.

Further bolstering that argument is the fact that NIO sales have slowed to a trickle in China, with only 673 ES6 models and 164 ES8 models delivered in July. The market just isn’t there for Tesla in China. I will never be able to convince diehard Teslaphiles of that fact, I am aware. As they bid up TSLA shares in recent trading—although those shares are still down more than 15% from their level of one year ago—I will happily take the other side of that trade for my new trading vehicle, Excelsior Capital Partners.